US Tax Court cases in a nutshell. There are so many ambiguous areas of the tax code in which the IRS falls back on the old stand by "we'll consider all the facts and circumstances to determine if your position on a tax return should be supported." Tax court cases show us the IRS in action doing just that! (Please note that blogs may include sections copied directly from court case decisions found at ustaxcourt.gov)

Monday, January 16, 2012

The ‘It’s all Residential’ Case

http://ustaxcourt.gov/InOpHistoric/BrownSum.SUM.WPD.pdf

This court stems from a state issue that is becoming more and more common. Normally unearned income is only taxed in the state of your primary domicile. A number of taxpayers from New York who also have homes in other states (with lower tax rates) attempt to attribute this income to the state where their second home is located. The extent of one’s presence in a state dictates whether or not one is a resident or nonresident. Taxpayers can’t just pick whichever state they prefer. NYS has become more and more aggressive about getting their pound of flesh. In this case the taxpayers reported significant capital gains on a SC return and NY successfully proved they should have been reported on a NY return. Taxpayers were within the time limit to obtain a refund from SC. The federal part of the issue was that the taxpayers did not report the approx $3500 interest the received from SC on the refunds. The taxpayer’s rationale was that they paid approx $7500 in interest to NY so the 2 should be offset.

Take aways:

• You can; apply your own logic to these situations! There has to actually be some legal support for your position.

• The tax code has always treated interest paid and interest received quite differently. All interest income is taxable unless a code section specifically excludes it. Interest paid is only deductible where the code specifies.